Let rupee appreciate, strengthen infrastructure platform: Bloom

Fri, Nov 6 02:39 AM

Rupee appreciation is a positive sign for the Indian economy, and should be allowed without much of an intervention. Frequent intervention would lead to an asset price inflation scenario, pointed out David Bloom, global head of currency strategy with HSBC.

Bloom noted that while emerging markets, including India, are expected to lead the global economic recovery in days ahead, the economy needs to focus on vital developments like strengthening its infrastructure.

"India needs to strengthen its infrastructure platform by investing more in rail, road and airport projects using its massive foreign exchange reserves, besides strengthening the local currency," said Bloom. India needs to invest in itself or else some western country would come forward to buy Indian assets, he added.

Blooms also said the Reserve Bank of India's (RBI) decision to buy 200 tonne gold is a striking feature as it will help in the diversification of resources.

"A growing economy needs resources and the central bank has done a right thing by buying gold. India has the option of building up the infrastructure in India, using the forex reserves and building up a strong currency," he said.

Meanwhile, talking about the gross domestic product (GDP) of the economy, Robert Prior-Wandesforde, senior Asian economist with HSBC, pointed out that the RBI is likely to hike the cash reserve ratio and other policy rates by 200 bps and 125 bps (repo and reverse repo) in 2010, to exit the easy monetary policy regime.

"We expect the WPI inflation to touch 8% by February-March 2010. The RBI will anchor inflationary expectations by triggering the rates," said Prior.

HSBC has forecasted a 6.2% GDP growth in 2009-10 and has raised its projection for India from the previous 8% to 8.5% for 2010-11.

Elaborating further, Robert said India has just experienced its worst drought for decades, with rainfall 23% below normal during the June-September monsoon.

"This is obviously bodes badly for the agricultural sector and we could see something like a 5% contraction in the sector during the current fiscal year. On top of this, there will be knock-on effects to ex-agricultural industries, which could cut output there by 1%, as demand for discretionary items decline. All in all, we estimate that the drought will lower the level of GDP by something like 1.5% in 2009-10," he said.

"Drought may cut 2009-10 GDP by 1.5%, but we are keeping our 6.2% growth forecast. Agriculture normally bounces strongly in year after a drought and we are raising our 2010-11 forecasts to 8.5%. Surprisingly, there is little evidence that droughts impact Indian inflation," noted Prior. On average, post-drought agricultural output has risen by 10.5% with base effects and concerted government efforts to aid the next season's crop, GDP could be boosted to the tune of about 2.5% in 2010-11 as a result, he added.

Talking about inflation, HSBC said that they find no clear evidence that droughts push up food prices.

"This probably reflects government-led efforts to boost imports as well as restrict the hoarding of products. Nevertheless, we still expect WPI inflation to hit 8% by March next year given international commodity price developments," said Prior.

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